What’s Wrong With Franchising? It’s Too Expensive! Really?

"It's too expensive!" – that's what most prospective franchisees say in The A to Zs of Buying a Franchise when they're asked "What's wrong with franchising?" The seminar is one of the most popular events offered at the International Franchise Expo.

But are the prospective franchisees right? Is franchising too expensive? "It depends on the franchise," replies Dr. John Hayes, who teaches The A to Zs of Buying a Franchise. "It also depends on people clearly understanding the various franchise fees. How do you put a price on McDonald's? Or on any famous franchise brand? Granted, most brands are not famous, and once upon a time neither was McDonald's. But part of what you're paying for in franchising is the potential for brand notoriety and the success that comes with it."

There are three primary fees in franchising:

The Franchise Fee
Royalties
The Advertising or Marketing Fund Fee

The franchise fee is a lump sum payment that's due at the time of signing a franchise agreement. This fee ranges from a low of $10,000 (rarely less) on up to $50,000 (sometimes more). Granted, at the higher end it's a lot of money, but it may be a very reasonable number, depending on how the money is used.

Dr. Hayes, author of 101 Questions to Ask Before You Invest in a Franchise, recommends that franchise prospects ask the franchisor, "How do you spend my franchise fee?" In other words, "What do you do with my money?" "Those are reasonable questions," continues Dr. Hayes, "and no good franchisor will shy away from answering the questions honestly."

Franchise prospects often believe that franchisors keep most of the franchise fees collected as profit. "Or they think the franchisor uses the money to enhance his own life. Cars, vacations, second houses, sending kids to expensive colleges, etc., have all been mentioned as benefits of franchise fees. However," says Dr. Hayes, "the real story may surprise and delight franchise prospects because good franchisors use the franchise fee to invest in the franchisee who pays the fee."

Franchising works only when a franchisor transfers knowledge and skills to a network of franchisees. The transfer occurs through a series of training programs and ongoing support. If a franchisor provides 10 days of initial training to franchisees, followed by several days of in-field training, and then numerous hours of support (in person, by phone, by email, etc.), what's that worth? Most franchisees start from ground zero when they invest in a franchise. They don't know where to begin. It's the franchisor's job to teach them not only how to start, but what to do for the next 5, 10 or more years to build a successful business.

"How much would you pay," Dr. Hayes asks his audiences, "if a franchisor trained you to succeed in a business where you took home a six figure income for the next 10 years? What's that worth to you? Is it worth paying $15,000, $30,000, $60,000 as a franchise fee?" Of course, there are no guarantees that the franchise will succeed, let alone pay out a big salary to the franchisee, but who would buy into a business that they didn't expect to succeed?

Training and support of franchisees is costly, and good franchisors use the franchise fee to pay for those benefits. If you think the franchise fee is too expensive, ask the franchisor to explain how much of the money is re-invested in your education and skill development. You may decide franchising is not so expensive after all.

In future columns I'll explain royalty and advertising fees.